Berko: Buy gold?

Dear Mr. Berko: I need advice on buying $40,000 in gold bars being offered by Morgan Gold. I would buy them in my individual retirement account. You told me to buy gold in 2001, when it was $275. So please tell me whether you would recommend this purchase now or you think I should wait to see whether gold falls more in price. And could you tell me the reason or theory as to why gold is supposed to increase in value? The registered financial consultant at Morgan thinks gold will go to $5,000 an ounce by 2014. He says his company can buy gold for me at a lower price than any competitor can. I know gold has almost doubled since 2009, but do you think it will do as well by the time I retire in 2030?

H.W., Syracuse, N.Y.

Dear H.W.:

The most accepted theory explaining the increase in the price of gold is called the greater fool theory. I believe gold and diamonds possess a similar value and a similar history. Both have historical significance; both have tangible industrial and personal use; and both have been sought after for thousands of years. But truth be told, the only thing that makes a 5-carat flawless diamond or a 440-ounce gold bar a wonder to look at is the realization of how much some silly idiot is willing to pay for it.

However, I think you have me confused with someone else. I’m certain as sunshine that I never recommended the purchase of gold in 2001 at $275 an ounce; in fact, I never have advised anyone to purchase the stuff and doubt I ever will.

The price of gold has actually been quite stable for several hundred years. In 1716, Sir Isaac Newton, who was master of the British mint, set the price of gold at today’s equivalent of $19.75 a troy ounce. In 1776, when George Washington was being rowed across the Delaware, gold was still $19.75 an ounce. The official U.S. government price of gold has changed only four times since then. It was raised to $20.67 in 1834, when Andrew Jackson was president, and raised again, to $35 an ounce, in 1934, during FDR’s first term. A two-tiered pricing system was created in 1968, and the price of gold was allowed to fluctuate. However, the official U.S. government price didn’t change again until 1972, when it was raised to $38 an ounce. In 1974, while Richard Nixon was occupying what was then called the Nut House, it went to $42.22. Last year, gold traded above $1,700 an ounce but subsequently has fallen to the $1,200-$1,400 level.

As I mentioned in a column last year, gold has been a poor investment. Since 1935, when you could have bought all the gold you wanted at $35 an ounce, its compounded annual return has been just 5 percent. I can’t knowledgeably advise you, because I have no feel for where the price of gold will be when you hang up your tools in 2030.

But I will tell you that Morgan may not be your best gold source. Those lads at Morgan have spent a king’s ransom in media advertising to get their name in front of the public as the nation’s premier gold source. Then they spent a queen’s ransom designing, printing and mailing their beautiful multipage color brochures. Then they spent a prince’s ransom furnishing a beautiful suite of offices in Irvine, Calif.Next, they spent a lord’s ransom on payroll, filling their offices with a support staff of lads, lasses and techies. Then they hired and trained a sales staff to respond to your inquiry, and they pay those boys a duke’s ransom each time they close a sale. All this stuff (and I’ve not included rent, legal, accounting, insurance, utilities or executive salaries) is called overhead, and it is a lot of money and built in to the cost of the gold they sell you. So I doubt Morgan can sell you an ounce of gold for less than the jeweler whose shop has been on Main Street for 31 years.